Equity shares are the most important source of raising long term capital by a company. A public limited company may raise funds from public or promoters as equity share capital by issuing ordinary equity shares. These instruments, however, have a lot of differences. 4. 3. Regular source of income. However, bank loans are non-transferable. 3. It simply states that a “debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge on the assets of the company or not [Sec. Also as the dividend is payable only at the discretion of the directors and only out of profit after tax, to that extent, these resemble equity shares. Source of Fund # 1. They are classified based on time period, ownership and control, and their source of generation. For this reason, they are also called ‘hybrid financing instruments’. Debentures. Retained Earnings. Ordinary shares also known as equity shares are a unit of ... Debentures are issued only for a time period and thus the company must pay the amount back to the debenture holders at the end of the agreed period. It has both the features of equity shares and the debt. They are neither completely similar to equity nor equivalent to debt. Equity Shares: Equity shares are the most important source of raising long term capital by a company. 1. MCQ Questions for Class 11 Business Studies with Answers were prepared according to the latest question paper pattern. Equity finance is a method of raising fresh capital by selling shares of the company to public, institutional investors, or financial institutions. The different sources available for raising fund are shares, debentures, loan, public deposits etc. The investors get fixed and regular interest, whether the company earns profit or not. Both types of capital have different characteristics from a civil law point of view. •Preference shares do not carry voting rights 7. STOCKS: Presently, there is nothing called stocks. These are also known as preferred stock or preferred shares. Preference shares have the characteristics of both equity shares and debentures. Debentures 4. Thus, preference shares have some characteristics of both equity shares and debentures. Debentures can be transferred from one person to another. The types are: 1. The salient features of this […] Preference share experience the perquisites of the dividend distribution first. Debt Capital: Debt capital includes debentures and term loans. The equity stockholders get the opportunity to cast their vote in major business decisions. either equity capital or debt capital. Debentures Debentures are an important instrument for raising long term debt capital. 9. Disadvantages of debentures. Dev has two projects A and B in hand. We have compiled NCERT MCQ Questions for Class 11 Business Studies Chapter 7 Formation of a Company with Answers Pdf free download. Since these stocks are given preference over equity shareholders, they are called preference shareholders. Financial capital (also simply known as capital or equity in finance, accounting and economics) is any economic resource measured in terms of money used by entrepreneurs and businesses to buy what they need to make their products or to provide their services to the sector of the economy upon which their operation is based, i.e. Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. Equity Shares: Equity shares are the most important source of raising long-term capital by a company. Equity share is an ordinary share. Bond and debenture are fixed interest providing debt instruments issued by companies and the government. It is an economical method of raising funds. The same amount of risk is involved in both the projects. ADVERTISEMENTS: This article throws light upon the three main types of long term financing. Convertible debentures are debentures which are convertible wholly or partly into equity shares after a fixed period of time. At the time of liquidation of the company, only after the payment of principal to the preference shareholders, the claims of the equity shareholders can be satisfied. Long term sources of finance refer to the funds, which are required for investment in business for a period exceeding up to five years. In finance, Equity refers to the Net Worth of the company. Generally, debentures and equity shares are the two choices sources of long-term capital for the company. Type # 1. The investment in equity costs higher than investing in debt. ... a company may raise loans through debentures. 2 (12)].Thus, the Act only states that it is a kind of security which constitutes a charge by way of security on issuing debentures. It is the owner’s funds which are divided into some shares. Non Convertible Debentures (NCD): Non-convertible debentures , which are simply regular debentures, cannot be converted into equity shares of the liable company. It is also named as long term capital or fixed capital. #2 Non-convertible debentures Excess of equity shares may cause over capitalization. In the capital market, both equity and debt instruments, such as equity shares, preference shares, debentures, zero-coupon bonds, secured premium notes and the like are bought and sold, as well as it covers all forms of lending and borrowing. Equity Shares 2. Debenture holders do not have any voting rights and there is no dilution of ownership. It is the source of permanent capital. Ordinary (equity) shares. Practicing these Formation of a Company Class 11 Business Studies MCQs Questions with Answers really effective to improve your … Preference shares resemble debentures as they bear fixed rate of return. If the rate of return of project A and B is 20% and 15% respectively, then under normal circumstance, which of the two projects is likely to be selected? They represent the ownership of a company and therefore, the capital raised by issue of these shares … It plays a major role in deciding the capital structure of the company. Preference Shares 3. 2. Ownership The law treats them as shares but they have elements of both equity shares and debt. In corporate finance, a debenture is a medium- to long-term debt instrument used by large companies to borrow money, at a fixed rate of interest. These sources of funds are used in different situations. Preference Shares 3. It is ideal to evaluate each source… Equity is the ownership stake in an entity, while share refers to the proportion of ownership of an individual in a company. 1. The law treats them as shares but they have elements of both equity shares and debt. The people who buy shares are referred to as shareholders of the company because they have received ownership interest in the company. Preference shares are a long-term source of finance for a company. Difference between Equity Shares and Preference Shares. (a) Equity Shares. Traditionally, the company used to give option of conversion of shares into stocks i.e. Investors who have a desire for a fixed income have no attraction for equity shares… Financial management chooses the appropriate sources for the acquisition of required funds. ; They get the benefit of receiving the dividend even before the equity … Generally, preference shares resemble equity shares in respect of maturity. Equity Shares: It is the most important sources of finance for fixed capital and it represents the ownership capital of a firm. Investments in these shares are safe, and a preference shareholder also gets dividend regularly. Equity share and Preference share are the two types of share that a company issues. (a) Project A (b) Project B (c) Both project A and project B (d) None of the above. The long-term sources are: 1. Financial managers properly analyze all available sources and choose one which provides funds at low cost and have fewer conditions attached to them. By investing in equity, an investor gets an equal portion of ownership in the company, in which he has invested his money. Interest-bearing bonds that can be converted from debt into equity shares after a specific period of time. This is a special feature that corporations take advantage of because it can attract lenders and usually carries a lower interest rate for the issuing company. This is an additional source of long-term finance. The cost of issue of equity share is higher than that of preference shares or debentures. The following are the limitations of Debentures. Optionally Convertible Debentures (OCD): The investor has the option to either convert these debentures into shares at price decided by the issuer/agreed upon at the time of issue. Answer: A large industrial enterprise can raise capital from the following sources. They represent the ownership of a company and therefore, the capital raised by the issue of these shares … A large industrial enterprise can raise capital from the following sources. They cannot be converted into equity shares. The companies can raise money through debentures easily compared to equity and preference shares. Convertible vs. non-convertible debentures. Security finance includes both shares and debentures. Equity Shares: It represents the ownership capital of a firm. There are two types of debentures: Convertible debentures: Convertible bonds or bonds that can be converted into equity shares of the issuing company after a predetermined period of time. Equity shares‘cannot be redeemed even if there is a danger of over capitalization. Loans from Financial Institutions and 5. Difference between Debenture vs. Equity Shares. Preference shares have the characteristics of both equity shares and debentures. Finance is available to a business from a variety of sources both internal and ex ternal. Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. 4. retail, corporate, investment banking, etc. Equity share capital is a prerequisite to the creation of a company. •These shares have a higher claim on the assets and earnings of the company than the equity shares • Dividend at a fixed rate is payable on these shares before any dividend is paid on equity shares •Preference shares have the characteristics of both equity shares and debentures. Preferred Stock is another long term external sources of finance. Fixed rate of dividends are paid to the preference share holder as in case of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders. 3. The Companies Act, 1956 has not defined as to what debenture means. Preference shareholders generally do not enjoy any voting rights. Ordinary shares are issued to the owners of a company. 7. Broadly speaking a shareholder will provide equity capital in return for shares (stock) which usually will incorporate voting rights. Like a bond, it has a claim on the assets of the company. Equity Shares 2. Long term sources of finance are mostly required for the purchase of fixed assets, such as land, building, machinery, etc. #1 Convertible debentures. The shareholder is the owner of the legal entity and is not entitled to Franchising. Fixed rate of dividends are paid to the preference share holder as in case of debentures, irrespective of the profits earned company is liable to pay interest to preference share holders.
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